5 Tips for Buying a Vacation Home

Before you purchase your slice of paradise, educate yourself about the process of buying a second home.

Ali Hardy Jul 19, 2019

A vacation home can be a dream to own, but what does it really take to make that fantasy a reality? Different mortgage and tax rules apply to second homes, especially if you plan to rent them out during the year. If you’re considering buying a second home, but new to the process, we’ve got you covered.

Jared Cook, regional sales manager for Zions Bank Home Finance, offers a quick primer on purchasing your second home.

Vacation Home Purchase Tip #1: Know the Guidelines

It’s important to note that purchasing a second home is not the same as purchasing an investment property. Although second residences can produce income, there are guidelines that differentiate between the two.

According to the Internal Revenue Service, to be considered a second home, you must occupy the residence at least 14 days each year. “You are allowed to rent it out throughout the year, however a second home that is rented 365 days of the tax year is considered an investment property,” Cook explains.

A second home, or vacation property, must also be at least 50 miles away from your primary residence, unless located in a resort area. For example, if you lived in Salt Lake City but had a vacation home in Park City, that residence would still qualify. According to the National Association of Realtors, 33 percent of vacation home buyers purchased in a resort area, 24 percent purchased in a rural area, and 18 percent purchased in a small town in 2018.

Jared Cook of Zions Bank
Jared Cook

“There are additional guidelines required to qualify a residence as a second home, such as property square footage, so be sure to speak with your lender about the home you’d like to purchase and how you intend to use it,” suggests Cook.

It’s wise to consult a CPA or tax professional to understand potential tax implications of this type of purchase.

Vacation Home Purchase Tip #2: Understand Terms and Rates

Mortgage terms and rates for a second home vary based on the product a buyer chooses, but in many cases interest rates are similar to — or within fractions of a point of — those for a primary residence. You can expect a 5 to 10 percent increase in your down payment for a vacation home, but, again, that depends on what type of mortgage you choose.

“Most consumers won’t notice a drastic difference between purchasing a second home and the experience they had purchasing their primary home,” Cook explains. “When it comes to documentation and underwriting, the process is virtually the same.”

Vacation Home Purchase Tip #3: Be Aware of Loan Requirements

“Another detail that you should understand is that, even if you plan to rent your second home most of the time, your bank or financial institution will not consider that potential rental income as part of your application when qualifying you for a second home loan,” Cook explains.

Projected income doesn’t count until it is received and recorded on your taxes, so keep in mind that you must qualify for the mortgage based on your current debt-to-income ratio. In addition, government-backed loans are generally not available to a second-home buyer, since they are meant for principal residences only.

Vacation Home Purchase Tip #4: Research Short-Term Rental Options

In 2017, 25 percent of people with vacation homes rented those properties as a short-term rental, according to the National Association of Realtors. As services like VRBO and Airbnb continue to grow, more second-home owners are taking advantage of the opportunity to make rental income from their residences during dates when they aren’t occupying them.

“At Zions Bank, we’ve seen second home purchases increase significantly since VRBO and Airbnb entered the market,” remarks Cook. “These companies are streamlining the short-term rental process for many owners of second homes.”

Despite the appeal, Cook advises owners to do their research before taking the leap into nightly rentals. “I have been a landlord before and making your home available to renters comes with many responsibilities,” warns Cook. He explains that although it’s attractive to allow rental proceeds to supplement your income, it’s important to fully understand and agree to the requirements of renting, including additional costs related to management and maintenance.

Vacation Home Purchase Tip #5: Consider a Condotel

Another option for those interested in renting their second home is what’s called a “condotel” — a mixture of the words condominium and hotel. Condotels are individually owned, but they are located in a building that operates much like a hotel, with features like a front desk and cleaning service.

Condotel owners can keep their unit for personal use, or they can make it available through the rental pool that is managed by the property. “These part-time residences are quite popular in resort areas such as Sun Valley in Idaho, Jackson in Wyoming and Park City in Utah,” says Cook.

Interested in a “condotel”? Contact a Zions Bank mortgage lender for more information regarding our unique condotel finance offerings. 

Ready to purchase a second home? Visit the Zions Bank Home Loan Learning Center to compare home loans, answer your mortgage questions and discover additional mortgage resources, including a directory of Zions Bank mortgage lenders across Utah and Idaho as well as more information about the home-buying process.

Loans are subject to credit approval. Terms and conditions apply. See a banker for details. Equal Housing Lender. NMLS #467014.

Ali Hardy is a freelance writer for Zions Bank.

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